Facebook: Profiting from Chaos

Data breach news created a massive opportunity that has since payed off

Shares of social media giant Facebook Inc. (NASDAQ:FB) have rallied nearly 30% since the emergence of reports that the data of over 87 million Facebook users had been compromised during the run-up to the U.S. general election.

News of unauthorized access to account information of millions of Facebook users in the U.S. resulted in the shares of the company dropping by more than 17% within a couple of days. Weeks later, several reports emerged suggesting that Cambridge Analytica may have accessed accounts of more Facebook users outside the U.S., including the U.K., the Middle East and Latin America.

Since March, Facebook has been involved in several inquests and courtroom battles with some still going on. And based on recent reports about the ongoing investigations into the Cambridge Analytica debacle, it appears that Facebook may be evading questions. According to U.K.’s Digital, Culture, Media and Sport Committee chair, Damian Collins, the company continues to "display a pattern of evasive behavior" when quizzed about Cambridge Analytica and misuse of its data.

Collins told the media today that Facebook’s evasive behavior started when the body started the inquiry into Cambridge Analytica. He also added that Facebook “appears to prefer minimal over rigorous scrutiny ... We will be addressing this point as part of our interim report being published in due course."

By reading between the lines, this could be interpreted that the committee could threaten to pursue more rigorous measures in a bid to getting the full attention of the social networking giant.

Another key point is that this also explains why nearly everyone seems to have forgotten about the data breach whose news erupted just over three months ago. Facebook is keeping things quiet — and this has benefited the shareholders of the stock.

In fact, shares of Facebook have rallied to top the previous high reached between late January and early February when the entire stock market was hitting historical highs. The company appears to have cushioned the initial outcry and negative criticism, in turn, helping it to thrive in the chaos. Facebook has added nearly 10% in market value to top its market valuation of $512 billion at the end of 2017 with an additional $50 billion.

Its current stock price is also nearly 5% more than the highs reached on Feb. 1, which shows how the company has managed to control the narrative of the Cambridge Analytica inquiries, as well as public criticism.

While some investors may have rushed to dump the stock following the news of the data breach, those who stayed put have richly profited from the chaos. Even more interesting is the portfolio status of anyone who bought the stock after it plunged to trade at just over the $150 mark. Their return hit 32% a few days ago before the most recent pullback that has taken the stock below the $200 level puts their net return at about 29%.

From a fundamental perspective, there were some who suggested that the company’s ad revenue could suffer in the coming quarters with the expected tweaks in its data use policy and security structures.

When first quarter earnings were announced, there was little to read from the numbers because the news of the data breach broke during the third month of the first quarter. So, no impact was expected on those figures. However, analysts are expecting to see some impact of that chaotic period in the company’s second quarter results when they are announced on July 25.

Nonetheless, Facebook has maintained that its revenues remain unaffected by the news of the data breach and even as some of the bodies running inquiries into the activities of Cambridge Analytica continue with their investigations, it appears nothing major will fall in the way of Silicon Valley-based company.

In fact, most analysts remain optimistic on the company’s top line expectations with a projected revenue for the year of nearly $54 billion, implying a net growth rate of about 35%.

Facebook's earnings per share are also expected to register a robust growth rate of over 38% despite having to endure a handful of lawsuits following the news of Cambridge Analytica’s unauthorized access to user data.

In summary, just weeks after the news of the breach broke, several headlines pointed at Facebook’s compromised position that it found itself in while others called for a change in laws governing data usage and regulation. The social media giant appears to have come through that period without bruises, and those who bought the shares when the headlines send the stock plunging have reaped the benefits.

The question that remains now is, with the ongoing inquiries, are there more bones in the closet that Facebook would rather keep locked than let the prying eyes of the various bodies running the investigations stumble upon? This is probably why the company prefers minimal scrutiny. The chaos might not be over as investors continue to net profits.

Disclosure: I have no positions in stocks mentioned in the article.

About the author:

Nicholas Kitonyi

Nicholas the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

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